“Utilisation levels of most subcontractors supplying engineers in the US is down by around 30 per cent in the past three months. As the current restriction will not allow IT firms to move resources to the US, demand for subcons is likely to increase this year,” said Aditya Narayan Mishra, director and chief executive officer at CIEL HR Services. “The demand for using contractors (contractual staff) will mostly come from mid-tier and smaller IT firms which don’t have adequate hands in the US to execute projects.”
On an average, subcontracting forms about 10-15 per cent of total employee cost in most Indian IT services firms. In FY20, subcontracting costs stood at around 13 per cent of total employee cost for market leader TCS while for Wipro, it was at 22 per cent. Infosys spent around 12 per cent of its total employee cost in subcons during this period.
According to experts, as tier-I IT firms already have built up an employee pyramid with good number of local hires on their rolls, their dependence on the contractual staff will not increase due to suspension of non-immigrant visas by the Trump administration. Most Indian tier I IT services firms including Infosys, Wipro, HCL Technologies have a localisation ratio of more than 60 per cent.
Also, management of these big firms have also stated that they would reduce their dependence on subcontractors and instead utilise their own people as one of the cost optimisation moves.
However, this is not the case for mid-tier and small IT services companies which often move their own engineers from India to execute projects or depend on contractual staff to deliver projects.
Most of the mid-tier IT firms have around 40-45 per cent of their employee base in the US comprise of locals. These firms are expected to incur additional expenses towards engaging contractual staff, impacting their margins in the first three quarters of this fiscal.
“This proclamation will have negative implications on margins. Companies with lower levels of locally hired workers will see a greater negative impact,” a Goldman Sachs Equity Research report said.